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Depending on the purpose served by an accounting system, we can classify total accounting function in three broad type - basic accounting, management accounting, and external accounting.
Basic accounting represents the earliest form of accounting. It is used to facilitate the the financial transactions in an enterprise. External accounting is concerned with meeting the financial information needs of persons such as shareholders, government agencies, and others outside the company. Management accounting is used by managers of an enterprise in performing their planning and controlling functions.
Management accounting provides many different types of information and planning and control tools to help mangers to manage more effectively. More important of these aids to management are listed below:
- Cost information
- Planning Information
- Analysis - for example, break-even analysis and discounted cash flow analysis
- Financial ratios
The Institute of Management Accounting has defined management accounting as "...the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by management to plan, evaluate, and control within an organization and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies, and tax authorities."
Simply put management accounting distills the accounting information into summaries that can be used by persons who don't have strong accounting backgrounds. These summaries are usually used as a basis for various business decisions.
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